Friday, April 20, 2012

How the Fed Benefits Those Who Get the New Money First

Mark Spitznagel
Mark Spitznagel, founder and chief investment officer of the hedge fund Universa Investments L.P., knocks the ball out of the park in today's Wall Street Journal. With the precision of a Henry Hazlitt, Spitznagel explains exactly "How the Fed Favors the 1%."

The Federal Reserve benefits its favored class in the method it uses to push new money into the economy. The Fed does not increase everyone's cash balances simultaneously in the same proportion. It injects reserves into commercial banks and they then lend new money to borrowers. This injects money into the economy at specific places at specific times. As I said this morning in my conference presentation,
Increasing the money supply merely increases the amount of money being spent on the same quantity of goods, so overall prices increase and the purchasing power of the dollar falls. Those people who receive the new money first benefit while those people on fixed incomes are harmed. However, there is no general social benefit from inflation.
This point was made in the middle of the 18th century by Richard Cantillon and was also noted by the 20th Century's greatest economist, Ludwig von Mises.

The contribution of Mises is likewise recognized by Spitznagel. He writes,
In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke seems capable of) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.
Spitznagel cites Mises' students Rothbard and Hayek in explaining the pernicious effects of monetary inflation then hits the nail on the head has he explains the specific beneficiaries of our current inflationary monetary regime.
The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.
This has to be one of the greatest commentaries to appear in the Wall Street Journal in a long time.

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